Tuesday, March 2, 1999
DJIA 9348.14 +23.36 (+0.25%) S&P 500 1240.81 +4.65 (+0.38%) Nasdaq 2309.30 +14.12 (+0.62%) Russell 2000 397.15 +2.76 (+0.70%) 30-Year Bond 94 12/32 +15/32 5.64 Yield

An Investment Opinion
by Alex Schay

Xylan "Switches" to Alcatel

After a run-up of around 40% in the last two weeks, data networking firm Xylan (Nasdaq: XYLN) gained $9 1/8 to $36 1/16 this morning on the heels of the announcement that it will be acquired by French telecommunications giant Alcatel SA (NYSE: ALA) for $37 a share. The $1.9 billion deal comes in at 5 times Xylan's trailing sales, roughly 48 times trailing earnings (35 times forward numbers), and around 34 times trailing cash flow. The deal is hardly a surprise considering Alcatel's oft stated desire to fill in all the gaps in its product portfolio (DSC and Packet Engines). In fact, this morning Alcatel Chairman and CEO Serge Tchuruk announced that a deal to acquire a remote access equipment provider is also in the works and will be formally announced in the next couple of days.

Alcatel owns roughly 6.5% of Xylan already, and the two companies have engaged in numerous joint technology agreements over the last four years -- with Xylan raking in about 12% of its 1998 revenues from Alcatel (Xylan had a 20% revenue target in 1999 for Alcatel and IBM (NYSE: IBM) combined). Considering that Xylan is currently working with over 100 carrier customers around the world, it's a natural fit for the firm to become the enterprise data networking hub for Alcatel.

Evidence of the strategic necessity of incorporating "data solutions" into telecommunications' portfolios has already been amply documented over the last two years with Northern Telecom (NYSE: NT) purchasing Bay Networks and Lucent (NYSE: LU) recently acquiring Ascend Communications. However, Cisco's (Nasdaq: CSCO) presence in the game really makes the race -- at least for the moment -- a question of who will come in fourth place. With the European market growing off of a much smaller voice and data base, there is enough room for the major European players -- Alcatel, Ericsson (Nasdaq: ERICY) and Siemens AG (OTC: SMAWY) -- to garner a nice share of the pie. However, with Xylan rolling out some interesting products this year -- the OmniStack402G and OmniStack branch switches, plus the OmniCore ATM and gigabit backbone switch -- it looks like a newly reorganized Alcatel might pull ahead going into the first turn.


Large appliances maker Whirlpool Corp. (NYSE: WHR) spun ahead $4 5/16 to $45 5/16 after saying it plans to keep its Brazilian compressor-manufacturing unit and expects double-digit earnings growth for the first quarter and for the year. The company added that it will buy back up to $250 million in stock.

Several airline stocks were cleared for takeoff this morning after Goldman Sachs raised its ratings on three of the industry's big players. American Airlines parent AMR Corp. (NYSE: AMR) gained $2 1/2 to $58 5/8, United Airlines' big daddy UAL Corp. (NYSE: UAL) was lifted $3 1/4 to $65 1/4, and Continental Airlines (NYSE: CAI.B) added $15/16 to $37 thanks to upgrades. Tagging along for the ride, US Airways Group (NYSE: U) advanced $2 5/16 to $51 1/4, Southwest Airlines (NYSE: LUV) moved up $7/8 to $31, Northwest Airlines (Nasdaq: NWAC) picked up $9/16 to $26, and Trans World Airlines (AMEX: TWA) tacked on $3/16 to $6 3/16.

Cable-based Internet services provider @Home Network (Nasdaq: ATHM) moved up $9 9/16 to $116 11/16 after setting a two-for-one stock split. Credit Suisse First Boston started coverage of the firm with a "buy" rating today, estimating the company's fiscal 1999 loss at $0.03 per share.

Laser vision correction systems designer VISX Inc. (Nasdaq: VISX) blasted ahead $16 11/16 to $77 3/16 after saying strong demand for its products will lead to Q1 EPS between $0.51 and $0.55, well ahead of the $0.36 the company said analysts had been expecting. BancBoston Robertson Stephens raised its opinion of the company to "buy" from "long-term attractive."

Nuclear medical imaging systems maker Adac Laboratories (Nasdaq: ADACE) gained $5/8 to $19 after saying it has completed the restatement of its results for fiscal 1996, 1997, and the first three quarters of 1998, which was initially announced in December. The company also reported fiscal Q1 EPS of $0.30 (before charges), up from $0.17 a year ago.

Computer telephony systems components maker Dialogic Corp. (Nasdaq: DLGC) dialed up a $5 11/16 gain to $36 9/16 after software giant Microsoft (Nasdaq: MSFT) agreed to make a $24.2 million equity investment in the company, which works out to a 5% stake. Microsoft also agreed to license Dialogic's CT Media server software and retain the company's development services in exchange for $20 million in payments over the next four years.

Mining and lumber holding company Maxxam Inc. (AMEX: MXM) logged a $11 3/8 gain to $59 1/4 after its Pacific Lumber Co. subsidiary reached a last-minute agreement with federal and state agencies to preserve thousands of acres of old-growth redwood forests in California. Maxxam will reportedly receive about $480 million for its logging rights under the deal, which will create a public preserve for the ancient redwoods.

Brand name apparel manufacturer Warnaco Group (NYSE: WAC) climbed $1 7/16 to $22 3/16 after reporting Q4 EPS of $0.78, which was in line with the Zacks mean estimate. The company also said it has acquired the distribution rights for Calvin Klein Jeanswear in Canada and a 70% stake in U.K.-based perfume and soap retailer Penhaligon's.

Speech recognition technologies developer Lernout & Hauspie Speech Products (Nasdaq: LHSPF) was lifted $2 7/8 to $30 7/16 on news that founders Jo Lernout and Pol Hauspie plan to buy up to an additional $40 million of the firm's stock.

Call center automation systems designer InterVoice (Nasdaq: INTV) gained $1 3/16 to $12 5/8 after saying a strong domestic market for its customer premises equipment will result in fiscal Q4 (ended Feb. 28) EPS between $0.24 and $0.26, topping the $0.19 currently expected by the four analysts surveyed by Zacks.

Online sports information provider SportsLine USA (Nasdaq: SPLN) sprinted ahead $3 to $52 5/8 after BT Alex. Brown raised its rating to "strong buy" from "buy" less than two weeks before college basketball's annual tournament is expected to start drawing more eyes to the company's namesake website.


PC direct seller Micron Electronics (Nasdaq: MUEI) dropped $2 1/2 to $11 15/16 after warning that its fiscal second quarter (ending March 4) sales will drop 6% to 9% from the $403.5 million it reported in the first quarter. While overall gross margins will be flat compared with the previous quarter, PC gross margins are projected to fall about 1 percentage point from 15% in Q1. The company, scheduled to announce Q2 earnings on March 22, will hold a conference call today at 3:30 p.m. Mountain time. To take part, dial (630) 395-0074. The pass code is "mid market." Majority owner Micron Technology (NYSE: MU) lost $1 11/16 to $55 13/16.

Dutch enterprise software company Baan (Nasdaq: BAANF) dumped $5/8 to $8 5/8 after reporting a Q4 net loss of $1.45 per share, well off the $0.54 per share loss estimate provided by First Call. The company has concerns about demand in the coming year. "Recently a number of other enterprise application software vendors have warned of slowing market conditions," Baan said in a statement. The company "expects that it will continue to be negatively impacted by these trends during 1999."

Network integrator Pomeroy Computer Resources (Nasdaq: PMRY) lost $1 9/16 to $20 3/4 this morning. The company announced a three-year contract to provide computer, software, and peripheral procurement and support services to consumer products giant Procter & Gamble (NYSE: PG). The contract is worth approximately $75 million.

Performance Technologies (Nasdaq: PTIX), which makes communications, networking, and data storage interface systems products, slid $5/8 to $11 1/8 despite turning in Q4 EPS of $0.26, better than last year's $0.18 and First Call's three-analyst $0.22 consensus estimate.

Drug developer Immune Response Corp. (Nasdaq: IMNR), which appointed Rand Mulford CFO and senior vice president today, shed $11/16 to $8. Mulford was president and CEO of San Diego's World Blood Inc.

Computer products e-commerce technologies provider pcOrder.com (Nasdaq: PCOR) continued to slide in its third trading session, losing $1 1/16 to $40 7/8 after giving back $5 3/16 yesterday.

Biopharmaceutical company Hollis-Eden Pharmaceuticals (Nasdaq: HEPH) extended yesterday's losses, dropping $7/8 to $17 7/8. The stock fell $2 5/8 yesterday after President and Vice Chairman Terren Peizer resigned. In better news, Hollis-Eden said the FDA gave it the green light to start dosing patients in a Phase I/II clinical trial of its HE2000 HIV and AIDS treatment.


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